Cicero Policy Briefer

Issue 15, August 2007

Pure and simple: why the ICOB review is overdue

By Tom Baigrie, Managing Director, LifeSearch

It has already been two years since the FSA introduced ICOB, the insurance conduct of business rules which determine how all general insurance and pure protection policies are sold and administered. Now, inevitably, it’s time for a review—though unlike some of the regulator’s other recent interventions, one could argue that this review is long overdue.

Even before 2005 there were apparent problems with the FSA’s approach. Notably, the rules didn’t make any allowance for the complexity of pure protection policies when compared to other general insurances such as home or motor insurance.

In essence, all general insurance policies were subjected to the same degree of ‘light touch’ sales regulation based on a belief that consumers could be offered adequate protection in a market where all general insurance products are perceived to be simple and low-risk. However, in reality, treating protection like a commodity purchase is not consistent with treating your customer fairly. Each customer has a different set of needs to the next, which makes protection a complex affair even when advising a client with seemingly basic needs. The fact that the FSA failed to grasp that truth in 2005 has now been shown to be a folly.

The FSA now argues that poorly informed consumers are more likely to make inappropriate choices which don’t reflect their individual needs such as their medical history. And that those consumers may make poor value purchases or end up buying policies on which they are not eligible to make a claim, as has been found to be the case with many PPI policyholders. Our own consumer research backed up that claim by revealing that term assurance increasingly makes up the lion’s share of all protection policies sold, even among those consumers whose profile would suggest that other more appropriate and more suitable alternatives may exist, such as those on lower incomes, younger people or those with no dependents.

In framing the current ICOB rules, the FSA claims that it was simply responding to industry demands at the time. But not all the industry agreed with that line of approach at the time and the FSA’s change of tune is to be very much welcomed. The recent launch of the FSA’s consultation paper—CP 07/11—not only gives us the opportunity to address some of the current imbalances but it marks a critical moment in deciding what kind of regulation we want to see govern the UK’s retail financial services market.

The move towards a more principles-based approach to regulation is inherent in the ICOB review thinking. This should be seen as a positive in shifting the emphasis away from processes to outcomes. Successful regulation must surely be measured by how it serves consumers’ needs rather than compliance officers ticking boxes. Also, the principles of better regulation and only regulating where the market is seen to be failing is also clear with the proposals for sharpening the rules on PPI sales. However, it is still not clear whether the regulator fully understands what is driving the market place or why it is that the protection gap, currently estimated to stand at over £2.3 trillion, continues to grow.

From our perspective the reality is simple. The burden of regulation has made financial advice more expensive, which has pushed firms increasingly towards non-advised channels. Yet, as consumers enjoy less access to financial advice, they increasingly fail to properly address their protection needs. The changes now proposed by the FSA, which are indeed largely constrained by the scope of EU directives, may push the current imbalance even more in favour of non-advice, for example, by scrapping detailed rules for insurers while maintaining them for intermediaries.

And as the market for advice contracts, the protection gap will continue to increase. The FSA must therefore take the opportunity presented by the ICOB review to make a more stout defence of the advice market. The FSA is proposing that insurers must in all protection sales explain whether they are providing advice or not. Yet, for status disclosure to make a real difference, non-advisors must also be required to explain more fully the consequences of non-advice. Only once we have in place regulations which truly value financial advice in promoting better outcomes for consumers, can we hope to see an end to the current market conceit: that price is the only measure of good value and that protection is a simple lifestyle choice. Nothing could be further from the truth.

Tom Baigrie is the Managing Director of LifeSearch and can be contacted here.

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